Barnes & Nobles' 'Nook' Defense

Barnes & Noble
knows that if you want something done right, you have to do it yourself.

Launched Thursday and shipping in November, the retailer's highly anticipated e-reader, known as "Nook," certainly seems to have been done right--even compared to the two other reading devices that have recently been announced as selling books from
Barnes & Noble's
digital bookstore. The thin, paperback-sized device features an
AT&T
3G connection, a wi-fi connection that allows users to browse through books in Barnes & Noble's stores, as well as two screens--one LCD touch screen for easy navigation and one energy-efficient electronic ink screen for long-form reading.

That touch screen in particular is a flashy upgrade to the e-reader format. Running
Google's
Android operating system, it switches between a virtual keyboard and an iPhone-like scrollable display of titles. The operating system will allow Barnes & Noble to introduce new applications for Nook over time, though the company hasn't revealed whether third-party developers will also be invited to develop applications for the device.

"This is Nook," Barnes & Noble.com President William Lynch told a crowd at the device's New York launch, as he held up the slim gadget. "This is the most full-featured, fun, stylish and easy to use e-reader on the market."

But Forrester analyst Sarah Rotman Epps says that the impressive set of capabilities combined with a $259 price tag adds up to another Nook feature that is less favorable for Barnes & Noble: a thin, or possibly non-existent profit margin. "With two screens and a built-in wireless subscription, they're offering more than Amazon for the same price," says Epps. "They're not making any money off this device."

Over the last year, the price of e-readers has been dropping dramatically. In June, e-book maker Interead released the Cool-ER, a $249 device that undercut the $300-plus offerings from
Amazon
and
Sony
. Sony responded with a $199, five-inch screen reader known as the Pocket Edition, and Amazon cut its price twice, now offering its second-generation Kindle for $259.

In matching that barely profitable price, Barnes & Noble aims to do what it's always done: profit from selling books. Over the last month, the retailer has announced partnerships with two other e-reader companies, Mountain View, Calif.-based Plastic Logic and Dutch firm IREX, to offer their collection of more than a million digital books on the new devices. (See "A Credible Kindle Killer.") That partnership strategy contrasts with Amazon's history of selling its books only on the Kindle and through its Kindle-for-iPhone application--not competing e-reader devices.

Barnes & Noble's e-book foray represents an attempt to take its own share of the wave of customers shifting from brick-and-mortar stores to digital reading. Amazon owns much of that trend today, with around 60% of the digital reader market, and Forrester expects Amazon to sell 1 million more Kindles in just the fourth quarter of 2009. Nook seems poised to grab a major chunk of Amazon's lead, given its competitive price and slick features.

But while Nook, along with the Plastic Logic and IREX deals, could help Barnes & Noble take back some of those digital-trending customers, it also cannibalizes the company's profitable retail business. To compete with Amazon, Barnes & Noble will have to sell its books for around $10 each, far less than the price of a typical hardcover in its brick-and-mortar outlets.

As bookselling moves to Kindle- and Nook-like devices, that means Barnes & Noble faces a quandary similar to the print media: How to maintain its high, brick-and-mortar operating expenses in the midst of digital disruption. "Ask any veteran of the digital media wars," Forrester's Epps wrote Tuesday in a blog post. "It's hard to compete for digital dimes when you pay your brick-and-mortar rent in analog dollars."